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Updated Apr 16, 2024

Loan FAQs: Common Questions About Getting Business Loans

Getting the right type of financing doesn't have to be complicated when you understand the lending process.

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Adam Uzialko, Business Strategy Insider and Senior Editor
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This guide was reviewed by a Business News Daily editor to ensure it provides comprehensive and accurate information to aid your buying decision.

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Finding a loan for your small business can be challenging. Navigating interest rates, loan terms and various financing types takes time, energy and research. Additionally, you must carefully review your unique financial situation, manage your debt and credit, and determine how much you can afford to borrow.

Misunderstanding and misinformation further complicate this process. To help business owners navigate the business loan process, we sat down with financial experts to decode business loan facts and fiction.

Business Loan FAQs

1. Is getting a small business loan the hardest thing you’ll ever have to do?

No. Like other forms of financing, obtaining a small business loan is all about preparation. Ensuring your books are transparent and you maintain the reserve liquidity to convince the lender that you can service your debt consistently and on time will lead to success. Experts agree that the best way to avoid unnecessary snags is to prepare for the application process.

“A lot of the frustration around obtaining small business financing can be eased by doing your due diligence,” advised Michael Adam, former CEO of Bankmybiz.com. “Be prepared, and have all your documents ready to present to lenders.”

2. Do you need perfect credit to get a small business loan?

No. While a poor credit history is one factor that can stop you from getting a business loan, options are available for borrowers with less-than-stellar credit. Alternative and private lenders often offer more flexible loan contract terms, including the level of creditworthiness they can approve.

“While traditional banks may be restrictive when it comes to obtaining credit, there are alternative options,” explained Michael Kevitch, senior underwriter with CFG Merchant Solutions.

Alternative lending sites like SBG Funding tend to base lending decisions on a business’s financial realities instead of the business owners’ financial history (read our SBG Funding review to learn more). Kevitch explained that many alternative lenders evaluate business performance, industry type, time in business and cash flow before approving a loan.

TipTip
To build business credit and position yourself for more favorable loan terms, open a business bank account and apply for a business credit card to build a relationship with that institution.

3. Is the best way to obtain a loan for your business through a bank?

Not always. Entrepreneurs have several choices for obtaining financing; getting a bank loan isn’t the only option. Alternative and private lenders and creative financing options like invoice factoring and merchant cash advances exist. These avenues can help business owners find a capital infusion without going through the lengthy and restrictive application process conventional lenders require.

Kevitch said bank loans may be more trouble than they’re worth for business owners looking to borrow a relatively small sum (between $5,000 and $250,000). Banks are more suitable for businesses interested in borrowing a large amount of cash and repaying the loan over a long period at a relatively low interest rate. Kevitch advised business owners to ensure they fall under those categories before applying through a bank.

Banks typically prefer to provide more extensive loans to businesses because they can make a larger profit on interest rates. This situation may not be the best option for a small business seeking modest, fast cash.

Instead, Kevitch said, alternative lending sources often provide faster approvals for shorter loan repayment periods; sometimes, businesses can access funds in as little as seven days. Because the terms are more flexible, interest rates are often higher.

Did You Know?Did you know
According to the Biz2Credit Small Business Lending Index, some alternative lenders approve almost 30 percent of applicants. In contrast, traditional banks only approve about 15 percent.

4. Is the worst way to obtain a loan for your business through a bank?

There is no “worst” type of financing; it depends on your business’s circumstances and your ability to reliably service the debt you take on. Just because you can obtain financing elsewhere doesn’t mean conventional lenders and bank loans aren’t good options.

A bank may offer the precise funding option you need. In fact, according to Adam, traditional bank funding is generally a great option for established businesses looking to grow at a moderate rate. When a business doesn’t fit those specifications, business owners should consider shopping around.

“If you are a younger company, pre-revenue or low revenue, but plan to grow very quickly due to the industry that you’re in — e.g., healthcare, IT or software consulting — then a traditional bank loan may actually limit your growth,” Adam advised.

To decide whether a bank loan is right for your business, research both traditional loans and financing options that bypass banks. It’s also important to know your business inside and out.

“If you anticipate steady growth over the next few years, then a traditional bank may be best,” Adam recommended. “If you are growing like crazy and you know you will need to keep increasing your loan size by large increments each quarter, then entertain a nonbank lending partner, as banks may not be able to keep up with your needs.”

FYIDid you know
Alternative lenders offer term loans and other types of financing, including working capital loans, merchant cash advances, equipment financing and invoice factoring.

5. Is it true that the more money you ask for, the less likely you are to be approved for a small business loan?

No. The requested principal loan amount should not adversely impact your approval. Lending institutions are generally prepared to fulfill large financing requests for the right borrower; it’s more lucrative for them in the long run. Don’t be afraid to ask for the money you need.

Evan Singer, president and CEO of the online Small Business Administration loan program SmartBiz Loans, said a business should apply for the amount it needs — whether it needs a microloan or a more significant amount. He recommends considering how much money you need to grow your business and how much you can afford to repay monthly.

“Make sure that you have cash flow to make your loan payments,” Singer cautioned. “That’s the biggest thing that a [lender] is going to check — that [the business owner] can actually afford to make their loan payments.”

6. Is the interest rate the most important factor to consider?

It’s easy to put too much emphasis on the loan’s interest rate. Essentially, the interest rate determines how much the loan will cost by the end of the repayment period. It’s certainly a crucial piece of information, but it’s just one aspect of the entire deal.

Although the interest rate is an essential aspect to consider when choosing a small business loan, there are many other factors to keep in mind. It is usually a good idea to ask about the terms of the loan, how soon you must repay the money and what you can use the loan for.

TipTip
When negotiating a business loan, the interest rate is one factor you may be able to adjust favorably. You may also be able to negotiate prepayment penalties and other fees.

7. What is the first step when seeking a business loan?

The first step when trying to get a business loan is gathering everything you need to apply, including knowledge and tangible items, such as the following:

  • Knowledge of how well bank term loans, SBA loans, and alternative lenders do or don’t fit your needs
  • Proof of your credit history, small business age and yearly revenue (many lenders set minimum thresholds for these values)
  • A sense of how much you can afford monthly in loan repayments and attendant fees
  • An idea of which items you might put up as business collateral, if necessary
  • A list of potential lenders
  • Documents like tax returns, bank statements, financial statements, legal documents and a business plan

8. What is the best way to fund a small business?

Although there’s no objective answer to this question, small business loans are a top funding option. After all, they’re used frequently for a reason: If you appropriately plan for them, you can budget for monthly payments fairly easily.

On the other hand, you might prefer seeking angel investors or venture capitalists because you may not have to repay them if your business fails. However, these options require giving up some business control and equity.

Other funding options include loans from friends and family, credit cards, crowdfunding, or business lines of credit. Each option has its own set of advantages and disadvantages. For example, consider the potential strain on personal relationships if you’re unable to repay a loved one. Credit-based options may be accompanied by high fees, making them less viable. And while crowdfunding can be a solid option, it’s important to note that it doesn’t guarantee reaching your desired funding level.

9. How long does it take to repay a business loan?

The answer to this depends almost entirely on your loan’s term. A loan with a five-year term should take that long to repay. That said, if you can repay your loan early, that’s a good thing as long as you don’t incur a prepayment fee. If there is a fee, you might want to hold on to that loan a bit longer. Your monthly expenses might be less than the potential fee.

Best business loan providers

When seeking business funding, avoiding predatory lenders is crucial. The best business loans are backed by ethical providers that offer reasonable terms and get you the financing you need to grow your company. Consider the following vetted options:

  • Biz2Credit: Biz2Credit is a lending marketplace that pairs small businesses with various funding types based on their needs and circumstances. The platform has leveraged its network to secure more than $7 billion in loans. Our detailed Biz2Credit review explains how this intuitive and easy-to-use tool helps businesses apply for options like term loans, CRE loans, working capital loans and Employee Retention Tax Credit (ERTC) loans.
  • Fundbox: Fundbox offers excellent lending options with competitive rates, transparent pricing and reasonable loan repayment options. We like that its repayment structures include weekly installments. Read our Fundbox review to learn about this lender’s Flex Pay program, which allows you to repay your line of credit in small chunks instead of monthly lump sums.
  • Rapid Finance: Rapid Finance is one of the most competitive lenders when it comes to financing small businesses in short turnaround times. In many cases, approval can occur within hours of your application, and loan sums can reach up to $500,000. Our comprehensive Rapid Finance review explains this lender’s flexible terms, easy online application process and relatively relaxed qualifications.

Business funding doesn’t have to be hard

Small business owners who need funding have countless resources at their fingertips — research your options, shop around and find the best lender to help your business thrive. Educating yourself on the lending process is the first step toward building a successful future for your company.

Matt D’Angelo contributed to this article. Source interviews were conducted for a previous version of this article.

author image
Adam Uzialko, Business Strategy Insider and Senior Editor
Adam Uzialko, senior editor of Business News Daily, is not just a professional writer and editor — he’s also an entrepreneur who knows firsthand what it’s like building a business from scratch. His experience as co-founder and managing editor of a digital marketing company imbues his work at Business News Daily with a perspective grounded in the realities of running a small business. Since 2015, Adam has reviewed hundreds of small business products and services, including contact center solutions, email marketing software and text message marketing software. Adam uses the products, interviews users and talks directly to the companies that make the products and services he covers. He specializes in digital marketing topics, with a focus on content marketing, editorial strategy and managing a team.
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